Sunday, 3 October 2010

Should Ed Miliband talk about inequality at the top? A reply to Tim Allan

Dear Tim,

In congratulating Ed Miliband in today's Observer, you warn him against breaking with New Labour, particularly on inequality at the top of our society. It is going to be important for Labour's new leader to seek to unite the whole party. A party representing a broad governing majority across British society is going to contain lively internal debates about many issues, and the leader's job is to make sure we are fighting for a common cause. So I hope he can rise to the challenge of proving that he can make a new generation of Labour electable, so that the party can again have the chance to change our society for the better.

Firstly, as you say Ed "won fair and square under the rules, so let's not dwell on that". Labour's electoral college is byzantine, but these are the same rules under which Tony Blair won 52% of trade union first preferences in a 3-cornered contest, without union endorsements. (And the especially low turnout among David Miliband supporting unions which cost him the election). So talk of "instruction" from union bosses is over the top. It is clear to everyone that the nature and closeness of the result places a premium on inclusive leadership, rejecting the practice and culture of factionalism which disfigured New Labour in government. I feel confident that would have anyway been Ed Miliband's intention: the very early signs there are positive. He will now need those who did not vote for him to be active participants and Labour champions in the team he leads.

More broadly, I am less fearful than you in thinking that we can and must move on from the New Labour era, without falling into a trap of unelectability, but it is right to insist that the break should be defined clearly and carefully.

In my view, we should be proud of so much of what New Labour achieved, as the most electorally and politically successful British centre-left project for half a century, while being aware that it become much narrower and less popular, after two great landslides and a narrower third victory, by the time Gordon Brown and Peter Mandelson ran as New Labour and lost as New Labour in 2010.

But a 2015 election - 18 years after 1997 - will be as distant from the first Blair landslide as 1997 was from Jim Callaghan's defeat in 1979. We can learn much from it but we can not relive or recreate it. The social, economic and political challenges have changed and we will have to do what New Labour did in the 1990s, and forge an effective new response. Ed Miliband was explicit last week that the next generation must learn from and retain what was best about New Labour: knowing we need a broad electoral coalition to win; aware of the need to be tough about winning public confidence on crime in order to also tackle the causes; and, above all, its revisionist willingness to rethink our policies and politics to connect with the society as it was, not as it used to be.

But the focus of your challenge is that it is damaging for Labour's leader to talk about the morality of pay at the very top of our society. You write:

To my mind the most critical and damaging line in your speech was when you said that "it is wrong, conference, that a banker [or presumably anybody else] can earn more in a day than a care worker can earn in a year".

It is hard to exaggerate the political importance of this position as a break from New Labour. New Labour's key insight was to recognise that helping the poorest in society could be done without setting limits on people's aspirations. So it is a line with huge political and practical implications. If it ever moved from conference rhetoric to actual policies, it would raise some difficult practical questions: will a maximum wage really be set at 250 times the wage of a care worker? Why not 25 times, or 2.5 times and what is the rational basis for such distinctions? Would the maximum wage apply also to entrepreneurs earning money from successful companies they have created? Would they have to stop trying to build their business and create new jobs when they reach the threshold?

You need quickly to counteract the dangerous perception that you are against success, against wealth creation, and want to dictate economic outcomes for the wealthiest rather than provide economic opportunities for all.

Firstly, I think you do indeed show that it is possible to exaggerate the break with New Labour, particularly in its early radical and insurgent phase in putting together that broad landslide coalition in opposition. It began by proposing a windfall tax to finance jobs programme to support aspiration. Who said this to John Major across the dispatch box in 1994?

Isn't it time the Prime Minister took a grip on these privatised utilities and put a stop to excesses that are offensive to the British sense of justice? ... Isn't the point one of efficiency as well as justice? If we want a modern, motivated workforce we can only do it on the basis of investment, partnership and fairness - not on the old Tory notion of greed at the top and insecurity for the rest."

As you were there, you will know that it was Tony Blair, of course. British Gas boss Cedric Brown had pocketed a 75 per cent rise, taking him to £475,000 a year. He was a "fat cat", pocketing "rewards for failure", said New Labour, using considerably more emotive language then than in response to the banking crisis over a decade later, where "Red George" Osborne outflanked Labour in rhetorical volume.

***

The thrust of your argument suggests that we can not question any rewards in society without quickly heading for equality of outcome:

"will a maximum wage really be set at 250 times the wage of a care worker? Why not 25 times, or 2.5 times and what is the rational basis for such distinctions?"

But why does this follow? To take offence at what Ed Miliband said, you might prefer to accurately report that he explicitly cited a differential of 365:1 - earnings in a day against those in a year. So one can turn the rhetorical device around: 'If a political leader should never criticise differentials in society of 365:1, does that apply equally to 36500:1 to 36.5 million: 1?"

Nor are these rhetorical questions with no practical examples. When Peter Mandelson proved intensely unrelaxed this Spring about Bob Diamond's £63 million pay from Barclays, that was addressing a 4200:1 pay differential - just over ten times beyond that which Ed Miliband was criticising last week. As Mandelson said:

“If you look at Bob Diamond, who took £63 million in pay — that to me is the unacceptable face of banking. He hasn’t earned that money, he’s taken £63 million not by building business or adding value or creating long-term economic strength, he has done so by deal-making and shuffling paper around.”

He added: “If anyone could justify that I’d like to see them do so. Just because somebody is very rich, it doesn’t mean to say different standards of morality apply to them.”

Do you disagree with Lord Mandelson about this case? Should Diamond have been beyond public criticism if his company were prepared to pay that?

***

Ed Miliband does not favour a maximum wage - and has said so during the campaign. Perhaps he should say so more clearly. But it is perfectly possible to come up with a rationale for being concerned about differentials of 350:1 but not those of 15:1.

“The average ratio of boss-to-worker pay among FTSE 100 companies has reached 66:1 – with executive pay and bonuses far outstripping firm performance in the 1990s and 2000s. The impact of this on pay inequality was always a moral concern, but its contribution to the credit crunch was economically catastrophic.

“I have supported calls for a High Pay Commission to investigate what’s been driving these trends. But we need a solution, not just a process. And I think an important part of that solution lies in spreading power, transparency and accountability within companies. Decisions that are currently taken by an elite in the shadows need to be opened up and brought out into the light.”

There was common Milibandite cause about this, as Ed Miliband said in the campaign too:

The differentials of 80, 100 or more between those at the top of a company and those at the bottom are just too high. And we should say it. Some people will say that the market justifies this. Personally, I don’t believe it because many of these rewards come from cosy remuneration committees where the chips are stacked on one side.”

So how might this moderate Milibandite politics of scrutinising very high pay proceed?

Firstly, one of the most important questions: are high rewards earned? The executive director for financial stability of the Bank of England, Andrew Haldane, has provided the most detailed and compelling evidence to show that the enormous shift in rewards from 1986 to 2006 were not earned by success. Robert Peston has succinctly summarised Haldane's detailed review of the history of rewards for banking:

In the full period from 1900 to the end of 2008, the annual average return on financial shares was less than 3%, almost identical to the market as a whole. For 85 years investing in bank shares was "close to a break-even strategy" (his words), nothing special.But in the subsequent 20 years, from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%, which was the best performance by financial-sector shares in UK financial history. And it's no coincidence that the pay of top bankers also zoomed up to the stratosphere ...

... What went so right in 1986 to 2006? Had top bankers become much more brilliant than their predecessors, such that they deserved disproportionate rewards?

... So what has Haldane discovered about the golden banking years from 1986 to 2006? Were the super-normal returns of banks the consequence of management skill, viz high returns on gross assets? Or were they casino profits, generated because banks in general increased their leverage, their ratio of assets to equity? ... in the seven years before the crash, British banks' bumper profits were in aggregate generated wholly by a massive increase in leverage by the industry: and in Haldane's view, these would be returns generated by gamblers' luck, the jackpot from the roulette ball landing on black".

If Haldane is right about the evidence, your critique of Ed Miliband would appear to be defending unearned rewards and rewards for failure in the name of fairness and aspiration. What could possibly be the New Labour case for doing that?

Secondly, this is where most people are. Public attitudes are deep-rooted, reflecting a complex interaction of ideas about merit, need and entitlement, as the Fabian Society has anatomised in detail in original research on the complexity of fairness attitudes for the Joseph Rowntree Foundation. A public consensus certainly legitimises a good deal of "deserved inequality" as fair, but very few people believe this entails an unconditional "good luck if you can get away with it" laissez-faire attitude to high rewards. Only a quarter of the public are strong free marketeers who believe that market outcomes are axiomatically fair. A similar number are traditional egalitarians who believe in much. The reason there are such broad is that this is a position shared by the 'angry middle' - those hard-working families in the marginal seats - and 'post-ideological liberals', who are evidence-based and so interested in avoiding a repeat of the 2008 crash, paying down the deficit fairly, and examining the evidence from Richard Wilkinson and others that more equal societies can be better for us all.

Thirdly, this is consequently where the political centre-ground is. Hence the daft debate about Red Vince's remarks to the LibDem conference. Note that the Tory prime minister David Cameron did not slam Ed Miliband for leaving the centre-ground: in an interview yesterday, he indicated that he shared his view:

“We have tried to come down hard on excessive pay in the state sector. I think that there are pretty strong things to be said about pay in other parts of the economy. I don’t have a problem with doing that.”

And David Cameron has asked Will Hutton to look at how to implement a 20:1 differential in public sector pay. It is a complex issue in the detail, but it is a perfectly legitimate policy goal which the centre-left should support. (So what are the chances of a 2:1 differential following on from it: to be precise, zero. Why? Because there will be broad public and political legitimacy for the 20:1 goal, as simply would not be for 'equal pay for all in public service'). Should public and private pay be considered to exist in parallel universes in the same society? Cameron's move is bound to affect the broader social and political climate anyway.

As the discussion went on it became clear that for many of the delegates, “sorry” simply wasn’t enough. They wanted actual retribution, in the form of jail sentences for the executives who were responsible for the ultimate losses, and through clawbacks of bonuses awarded to the masters of the universe in the fat years.

Rather remarkably (this is the World Economic Forum - the home of billionaire capitalism, after all), comments such as these generated a large round of applause throughout the auditorium. The tide truly has turned against finance. Thus it was that, at the end of the debate, when asked for a show of hands over who would support clawbacks of bonuses, the verdict was a resounding “yes”.

Does it fall to new Labour to take the last stand for the bankers, simply because even the bankers themselves will not?

Fourthly, there are fortunately a series of impeccably New Labour reasons for the centre-left party to form a vocal part of that consensus, rather than being silently to the right of several Conservatives, most Liberal Democrats and the Davos consensus on this issue. Roger Liddle - who as co-author of the Blair Revolution with Peter Mandelson of 'The Blair Revolution' was certainly present at the creation of New Labour, before advising Tony Blair in Downing Street - has made what this blog has called "an impeccably New Labour case" for greater scrutiny of top pay.

As Liddle has written, connecting his advocacy to where New Labour began:

What is needed in the UK is a change in political culture and discourse about questions of income and wealth. In The Blair Revolution published over a decade ago, I wrote “New Labour should use the tax system to attack unjustified privilege, withoutweakening incentives for risk-taking and hard work.” In crude and simple terms, we need to move from a society that is afraid to ask “How much have you got?”, to one that is prepared to question “How did you get it?” This was how Winston Churchill as a radical Liberal sought to turn the political argument in defence of Lloyd George’s redistributive 1909 budget.

In the early 20th century it was landowners who were seen to enjoy gross excesses of income and wealth, for which in Neville Chamberlain’s wonderful use of Biblical language “they toil not, neither do they spin”. The gross excesses of 21st century Britain are in different social categories: directors whose compensation packages have little or no justification in terms of their contribution to the profits and success of the companies they lead; investors who take advantage of Britain’s generous capital gains tax provisions but are not genuine risk takers, building a business from scratch through their own hard work; individuals who owe their comfortable circumstances to inheritance rather than their own efforts. What is needed in the UK is a change in political culture and discourse about questions of income and wealth

Similar arguments about inequality at the top have been made by Tony Giddens and Patrick Diamond. As Diamond has written:

'The tax system is deeply iniquitous because of the burden it imposes on the lowest paid. The rich enjoy generous tax relief. The poor pay a high proportion of their income in indiect taxes and the worst-off pay the highest marginal rates'.

Fifth, there are simple informational benefits in more public discussion to improve public knowledge at every level. Many of those right at the top seem to believe that 10% of people earn over £165,000, as Polly Toynbee and David Walker found in their focus groups of the super-rich, and so have no idea how exceptional their salaries are.

Those at every level tend to be misinformed - less spectacularly - because of a shared strong intuition that, wherever we happen to be, is pretty much "the middle". As one participant in a Fabian/JRF group said in a discussion about what various people should earn, when their position in the income scale was revealed:

I just don't believe that £42,000 is in the top [10%]. I would obviously have thought there is more than 25% of the country earn more than she does.

So Ed Miliband's point that a politics of aspiration in the middle needs to have something to say to the median earner on £21,000 in Reading is a very good corrective to much media discussion of "the middle", often meaning average earnings around the editorial table.

Finally, and importantly, one significant factor in determining levels of top pay are social norms, and part of political leadership is to help shape and shift these, just as Tony Blair sought to do in the mid-90s by voicing communitarian concerns that an excessively selfish individualism could crowd out the importance of what we share in common, even if New Labour was reluctant to discuss economic aspects of increasing social segregation. There was relatively little conspicuous consumption for the sake of status alone - of the Cristal champagne in nightclubs nature - during the long post-war boom from 1945 to 1980. It is quite right to say that Labour needs to understand aspiration. But the moral climate is shifting. Richard Branson, James Dyson, Alan Sugar and JK Rowling are widely seen as positive role models who have earned high rewards through hard work and exceptional talent as well as good luck; yet Phillip Green is increasingly seen as a much more ambiguous figure, because he combines lavish consumption with a rather voluntaristic approach to contributing to the common weal.

***

We can address top pay without a maximum wage

As David Coats has written, it suits both the orthodox right and the ultra-left to ignore this issue of social norms, so polarising the discussion around the question of a maximum wage. In my view, that is fantasy politics. But there are many other more productive ways to address concern about both the social and economic effects of high - and possibly excessive - pay right at the top.

Coats suggests these questions deserve greater scrutiny:

* Is there a relationship between talent and reward? What explains the escalating pay of those at the top? Which factors are important?

* How does the labour market for the highest paid actually work? Is it true that these rewards are driven by nothing more than the desire to recruit and retain the best? Or is there collusion and mutual backscratching generating the upward spiral of top pay?

* Is it true that most of the high value financial services sector would decamp to Dubai or New York if an effort was made to curb excesses at the top? If people did leave then how would this affect the UK economy? Would it matter at all?

* Are we talking about an exclusively Anglo-Saxon phenomenon here or have all developed countries seen an explosion of excessive rewards at the top? How have countries achieved more equitable outcomes? Where is the balance struck in those countries between regulation, taxation and social norms?

* Would it be practical to use salary caps (or average to top ratios) to restrain the exceses of the highest paid? What other instruments would work in the UK? Are corporate governance reforms needed - more transparency in the reporting of pay for example?

The arguments of City (and business) apologists must be tackled head on through an accumulation of evidence rather than a polemic driven by the politics of envy.

The advocacy of simple solutions may make us all feel bettter. But achieving a fairer distribution of earnings is a complex process

* what can we do about the reliance on low pay despite the successes of the National Minimum Wage?

* How can we achieve fair shares for those in 'middling' jobs?

* What can be done to restrain excess at the top?

Rising to that challenge demands a comprehensive strategy with a clear economic policy narrative ("if we do this we will do capitalism better").

A wide series of policy implications might arise from this. Some might be about regulation or taxation, such as whether the current 50p rate is legitimate given the need to tackle the deficit. Some may be issues of transparency and process - who sits on renumeration committees? How much disclosure is necessary in the public interest, especially in industries which may present systemic economic risks? Others may be broader challenges, such as whether or not FTSE 100 companies want to refuse civic pressure to pay a living wage.

These policy discussions will be important in themselves; they will also influence the broader social climate, for good or ill.

Politicians do talk about things which they do not plan to legislate against. This will be increasingly common in an age of "nudge" and the big society. Ed Miliband will (rightly) be told that passing a law is not the only way to change society; it would be inconsistent to tell him that he can never speak about issues about the character of our society without passing a law to determine every outcome.

It has always been the historic role of liberals and social democrats to save capitalism from its worst advocates and excesses. The tradition of FDR and Keynes was very clearly still alive in Gordon Brown's role in coordinating a global response to the banking crisis. Those social democratic concerns have usually been mirrored by most voices on the political right - from Stanley Baldwin to Ted Heath, Angela Merkel to David Cameron - that a successful social market economy depends on securing public legitimacy and consent. Almost every intelligent advocate of a publicly legitimate market economy has recognised that there is an unacceptable face of capitalism too.

If Ed Miliband wants to be in the centre-ground of British politics, most people will expect to hear that he believes that.